Behavioral Finance for Private Banking, 2nd Edition

CHAPTER 11Structured Wealth Management Process

Managing wealth is a difficult task since assets traded on a financial market never offer bargains, only trade‐offs. To find the best solution, one should combine the trade‐offs that the market offers with the preference of the investor, given the constraints of the personal financial situation. Study of behavioral finance is worthwhile in this respect, since it makes one aware of the typical mistakes in investing. It is difficult to say which mistakes are the most severe because a major disaster typically results from the combination of many aspects, which in isolation may not even be mistakes in other circumstances. For example, reference point behavior and mental accounting may be useful in some circumstances, but when applied simultaneously, they may lead to a loss of money. The following list attempts to order the behavioral traps, from fundamental factors to the more sophisticated ones¹:

1. A lack of planning of wealth management. The most fundamental mistake in wealth management is not to plan your wealth‐related decisions. Of course, planning consumes time and asking for advice may be expensive. Consequently, many clients try to hitch a free ride by imitating what others are doing, or they prefer to postpone the planning to another time. As the concept of hyperbolic discounting has shown, in the short run this looks attractive but ultimately, without proper planning, one will end up in an unfortunate situation.
2. Incorrect ...